Reuters - Stocks slid and oil prices rose sharply on Thursday after major escalation in the U.S. and Israel's war ​with Iran rattled investors, while the yen wobbled near the crucial 160 per dollar level as Japan's central bank left interest rates ‌unchanged.

As widely expected, the Bank of Japan left unchanged its short-term policy rate at 0.75% but joined the U.S. Federal Reserve and Bank of Canada in striking a cautious tone about the impact of rising oil costs from the conflict on inflation.

The yen was last at 159.61 a dollar as traders look for any hint of intervention, with Japanese finance minister Satsuki Katayama earlier saying authorities were ​prepared to "take necessary action at any time against market volatility".

"The comments this morning before the BOJ were made to warm up the market for ​intervention if markets sell the yen in reaction to the central bank's decision," said Kyle Rodda, senior financial analyst at Capital.com.

"160 ⁠looks like a critical threshold here. Barring any huge development in the war and energy markets, especially after last night's Fed decision, the USDJPY looks poised to ​test it."

The yen has dropped more than 2% against the dollar since the war broke out at the end of February as investors worry about the impact ​of a prolonged conflict on inflation and growth and head towards the U.S. dollar as the haven of choice.

WAR IN MIDDLE EAST WORSENS

The broader market though remains focused on the war in the Middle East and is coming to the realisation that the conflict is shaping up to be a prolonged one, stoking stagflation risk.

Iran accused Israel of striking its facilities in the huge ​South Pars gas field on Wednesday and retaliated by vowing attacks on oil and gas targets throughout the Gulf, firing missiles at Qatar and Saudi Arabia.

The ​hits to energy infrastructure sent U.S. crude futures about 1% higher to $97.07 per barrel. Natural gas rose more than 6%, while Brent futures rose to $112.19 a barrel, up 4.5% on the ‌day.

In stocks, ⁠Japan's Nikkei, opens new tab was down 2.5%, while South Korean equities, opens new tab fell 1.5%. MSCI's broadest index of Asia-Pacific shares outside Japan, opens new tab fell more than 1.5%. European futures were down more than 1%.

"This latest escalation feels like a turning point for markets because the conflict is no longer just about military headlines or Strait of Hormuz closure," said Charu Chanana, chief investment strategist at Saxo in Singapore.

"It is now hitting the plumbing of the global energy system. What is unsettling markets now is the growing stagflation ​risk. It means this is no longer ​just a geopolitical story but a ⁠macro one."

The dollar strengthened across the board, also buoyed by the Fed predicting just one more cut this year as the central bank left rates unchanged on Wednesday. Traders though are no longer fully pricing in any easing in 2026.

The dollar index , which ​measures the U.S. currency against six other units, is up 2.5% this month. The index was last at 100.06, ​slightly lower after a ⁠0.7% rise on Wednesday.

MORE CENTRAL BANKS AWAITED

In a week filled with policy meetings across the globe, investors have been parsing through comments to gauge the impact of the war, with the European Central Bank and Bank of England due later in the day.

The ECB and BoE, like the BOJ, are widely expected to keep interest rates steady, but attention will be ⁠on comments from ​officials on the impact of the war on inflation and growth.

Laura Cooper, global investment strategist at ​Nuveen, said the key question for policymakers is whether higher energy costs risk de-anchoring inflation expectations or whether the shock ultimately proves transitory.

"Rate hikes cannot increase oil supply, they can only suppress the demand ​response to higher prices, compounding the growth drag. Much of the adjustment to the energy shock therefore occurs organically."